Rates from Bankrate.com

Mortgage

Credit Cards

Auto

6 Steps to Figuring Out: Term Life or Permanent Policy?

Written by: Jeff Brown02/21/13 - 1:18 PM EST

NEW YORK ( TheStreet) -- Hey, here's a deal: Convert your no-frills term life insurance policy to a permanent policy that could add decades of coverage and, on top of providing a death benefit, function as an investment for retirement!

If you've had a term life policy for a while, you may find your agent or insurer pushing you toward this kind of move.

But is it such a good deal? Well, it's one of the many financial options a responsible person might consider, but it's far from a slam-dunk. Some of the alternatives might be cheaper and more flexible, as well as more profitable.

A term policy, typically lasting 10 to 20 years, provides a set death benefit if the insured dies during the coverage period. It works just like car or homeowner's insurance: Pay a premium, get coverage; stop paying, either because you don't want the policy anymore or the term has ended, and you don't get coverage. Simple.

With term, there's no investment component or "cash value" to draw on, but term life is very cheap. You might get a $500,000 death benefit for $100 to $200 a month, depending on your age and health.

Permanent policies have no end date -- they pay the promised benefit no matter how long you live. Many types build up cash value as a type of investment, and after a number of years earnings on this asset pay the policy's premiums. But you pay a lot for this. Premiums can be 10 times what you'd pay for a term policy with the same death benefit.

Consider this opportunity recently presented to a man in his early 60s. He had four years to go on a 20-year term policy with a $500,000 death benefit and an annual premium of only about $1,500. His insurer offered a chance to convert this to a permanent policy that could provide lifetime coverage even if he lived to 100, while his current term policy would terminate at age 66.

But the premium on the new policy would be about $17,000 a year -- 11 times what he was paying on the old policy. Would the extra years of coverage and chance to build cash value be worth that much?

For a man with a lifetime dependent such as a wife who did not work, it could be. Under his old term policy, she'd get nothing if he died after the policy expired when he was 66. If the couple had skimpy retirement savings, a permanent policy might make sense. Also, the current insurer might permit a conversion with no questions asked -- a benefit if the policyholder's poor health would keep him from getting a new permanent policy from another insurer.